Arbitration – Voluntary or Mandatory? The Use of Pre-Dispute Arbitration Agreements

Most cases submitted to Massachusetts Dispute Resolution Services for arbitration are by parties who, with equal bargaining power, mutually agree at some point after a dispute has arisen to avoid the many disadvantages of litigation and trial in the Court system and resolve their case through the use of a mutually acceptable arbitrator.

However, particularly over the course of the last twenty years, there has been a significant increase in the use of pre-dispute mandatory arbitration clauses being contained in various contracts existing between parties. More and more, contracts between knowledgeable businesses and professionals are being written to include mandatory arbitration of disputes arising under the contract, with all parties recognizing and seeking the many benefits afforded by arbitration over the prospect of expensive and lengthy litigation and trial in the Court system. Many such mandatory arbitration clauses involve and have become known to consumers, such as the requirement to resolve uninsured and underinsured motorist claims brought under the standard Massachusetts Automobile Insurance Policy by way of arbitration. Where parties, with equal bargaining power, mutually agree in advance to bring disputes that may arise between them to arbitration, the Courts have given great deference and support to the validity of such pre-dispute mandatory arbitration clauses.

The Massachusetts Arbitration Act, St. 1960, c. 374, § 1, codified, as amended, at G. L. c. 251 (Massachusetts Act), is this Commonwealth’s version of the Uniform Arbitration Act. The Massachusetts Act “expresses a strong public policy favoring arbitration as an expeditious alternative to litigation for settling commercial disputes.” Home Gas Corp. of Mass., Inc. v. Walter’s of Hadley, Inc., 403 Mass. 772 , 774 (1989), quoting Danvers v. Wexler Constr. Co., 12 Mass. App. Ct. 160 , 163 (1981). It provides in part: “A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties shall be valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

However, what about cases where a consumer may not know, or fully understand, or have little choice but being bound by contract to arbitration, and have given up their right to bring to Court their credit card company, telephone provider, bank, construction contractor, nursing home, employer, and perhaps others, in the event of a dispute with them? The Courts, both federal and state, have been called upon to decide the validity and enforceability of such arbitration clauses, with varying results. A review of some recent cases, focusing on Massachusetts, follows.

Statutory employment discriminationcases

Over the past two decades employers have seen a rise in the volume of employment related litigation as Congress has passed a series of laws expanding the protections granted to employees, their ability to enforce those rights in court and broadened the types of damages that employees can recover. The costs of defending an employment discrimination claim can often be greater than the value of the underlying claim. Employers became very interested in implementing a system that resolves employment disputes more quickly and more cost-effectively and looked to include mandatory arbitration clauses in employment contracts.

Beginning in 1991, the use and enforceability of employment arbitration clauses received support both from the United States Supreme Court and Congress. In Gilmer v. Interstate/Johnson Lane, 500 US, 20 (1990) the Supreme Court changed the landscape by endorsing binding arbitration of employment claims, including statutory employment discrimination claims. The Civil Rights Act of 1991, which expanded the right to jury trials in employment discrimination cases and broadened the damages available to plaintiffs, also included a legislative endorsement of arbitration when appropriate, and to the extent authorized by law, encouraged such resolution of disputes arising under the act or provisions of federal law.

While most states permit broad arbitration provisions in employment contracts to require that all employment disputes be resolved by arbitration, Massachusetts has joined the minority of states that will require an employee to arbitrate statutory employment discrimination claims only if the employee has specifically agreed to do so in the employment contract.

In Warfield v. Beth Israel Deaconess Medical Center, Inc., 454 Mass. 390 (2009), the Supreme Judicial Court ruled that a doctor fired as head of anesthesiology at Beth Israel Hospital can proceed with a sexual discrimination lawsuit in court, and is not barred by a mandatory arbitration clause in her employment contract. The court ruled that because an employment agreement between the hospital and the plaintiff did not explicitly cite gender discrimination as an issue to be decided by arbitration, that she has the right to a court trial. The court indicated that a party seeking to provide for arbitration of statutory discrimination claims must, at a minimum, state clearly and specifically that such claims are covered by the contract’s arbitration clause.

The court relied upon Massachusetts’ strong public policy and statutory interest under Massachusetts Gen. Laws, c. 151 (B) in protecting against employment discrimination. The court went on to decide that because Warfield’s common law claims were so intricately connected to her chapter 151 (B) claims, and because the evidence that Warfield would introduce in support of her statutory claims is virtually identical to the evidence she would introduce to support a common law claims, that all of her claims therefore should be resolved in one judicial court proceeding.

This Massachusetts result is contrary to past United States Supreme Court decisions that have held that when a complaint contains both arbitrable and non-arbitrable claims, the Federal Arbitration Act requires a court to compel arbitration of pending arbitrable claims when one of the parties files a motion to compel, even where the result would be the possible inefficient maintenance of separate proceedings in different forms. See Dean Witter Reynolds Inc. v. Byrd 470 US. 213, 217 (1985), as reaffirmed in KPMG LLP v. Cocchi, 211 WL 5299457 (November 7, 2007).

Before the Warfield case, where an employment contract had a broad arbitration clause, there was a rebuttable presumption that the employment dispute is covered by the clause. After Warfield, Massachusetts employers who want to arbitrate all employment disputes, including discrimination claims, must explicitly cite claims arising under federal and state discrimination statutes as being covered by the arbitration clause.

Wage Act Cases

The finding in Warfield was not continued in an Appeals Court case in 2009, Dixon v. Perry & Slesnick, P.C.,75 Mass. App. Ct. 271 (2009) where the appeals court held that wage act claims are covered by an arbitration provision encompassing “all disagreements and controversies arising with respect to the employment agreement”. The Appeals Court distinguished Warfield on the basis that Dixon’s claims arose directly from a term of the employment agreement, namely Dixon’s rate of compensation. This court noted that the Warfield decision also included the proviso that their conclusion in that case should not be understood to suggest that parties entering into an employment contract must specifically list every possible statutory claim that might arise or else the claim will not be covered by an otherwise broad arbitration clause. Warfield, 454 Mass at 401.

MCAD cases

The Massachusetts Supreme Judicial Court has also held that an employee can file a complaint with the Massachusetts Commission Against Discrimination (MCAD) despite being subject to a valid arbitration agreement that expressly covered claims of discrimination. Joule v. Simmons, 459 Mass. 88, (2011). Although Simmons had signed an employment contract in which she expressly agreed to arbitrate any claims of discrimination, harassment and hostile work environment, Simmons filed a complaint with the MCAD instead of pursuing arbitration. The employer requested that the court compel her to arbitrate her claims. The SJC decided that even a clear and unmistakable agreement requiring arbitration of discrimination claims would not affect an employee’s right to file a claim with the MCAD and participate in the MCAD’s investigation and adjudication of that claim. The court remanded the case so that the Superior Court could determine whether or not the arbitration provision was valid and enforceable.

The SJC further held that the Superior Court erred in denying the employer’s motion to compel arbitration and in staying further proceedings pending the outcome of the MCAD proceeding, indicating that there is no legal bar to having an arbitration and the MCAD proceeding continue concurrently, on parallel tracks. The SJC in that case did not find the concern for adjudication efficiency it had voiced in Warfield to be as compelling. The court did observe that the courts can and should preclude double recovery by an individual.

When remanded to the Superior Court, the judge ruled that the mandatory arbitration provision in this employment agreement was enforceable even though it drastically shortened the employee’s limitation period for bringing a claim and also incorporated outside terms that the employer can change unilaterally. Though noting the question was a close call, Judge Thomas Connors found that the court must take into account that the Supreme Judicial Court, when it rejected a challenge to an arbitration agreement based on unconscionability grounds in its 2007 Miller decision, Miller v. Eric Cotter & others, 448 Mass. 671 (2007), specifically cited as consideration that arbitration of disputes is heavily favored by statute and case law. Despite reservations concerning particular aspects of the agreement, the judge found that the agreement to arbitrate was not unconscionable.

Wrongful death claims

In Chung, at all v. StudentCity.com, Inc., USDC CA No. 10-10943-RWZ (September 9, 2011), a federal court judge in Massachusetts ruled that the parents of a student who died during a tour of Mexico could bring a wrongful death claim in Court against the company that organized the tour and is not barred by an arbitration clause contained in a registration form that the students signed before embarking on the trip. The court found that wrongful death is not, in any traditional sense, a claim of the decedent. The court found that because wrongful death is not derivative of the decedent’s claim, it would be inconsistent with fundamental tenants of contract law to nonetheless hold those beneficiaries, who did not sign the arbitration agreement, be bound by the arbitration clause.

This holding may be argued as having applicability in other cases involving a wrongful death claim brought where only the decedent signed a mandatory arbitration contract and the court has otherwise found that the arbitration clause is valid and enforceable. But see section entitled Nursing Home Contracts below.

Nursing Home contracts

In early 2007, the Massachusetts Supreme Judicial Court enforced an arbitration agreement contained in a nursing home contract signed by the son of the decedent/patient under a durable power of attorney in a wrongful death case. Miller v. Eric Cotter & others, 448 Mass. 671 (2007). In Miller, the plaintiff, Charles Miller, Jr., signed an agreement on behalf of his father pursuant to a validly executed power of attorney. After his father died while a patient at the nursing home, actions were filed against a physician who had examined his father, as well as the nursing home defendants, to recover for conscious pain and suffering and wrongful death.

The nursing home defendants filed a motion to compel arbitration, which was denied by the trial judge, whose denial indicated that to require the plaintiff to arbitrate some part of this claim against the nursing home defendants while having a Court action against a physician(s) not employed by the nursing home, results in an inequitable, inefficient and unnecessarily expensive duplication of effort that renders enforcement of this arbitration agreement to be (substantively) and procedurally unfair.

The Supreme Judicial Court disagreed and reversed this order. The court noted that the Massachusetts Arbitration Act ST. 1960, chapter 374, section 1, expresses a strong public policy favoring arbitration as an expeditious alternative to litigation for settling commercial disputes and that such agreements shall be valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.

As to the unconscionability argument made by Miller, the Court held that nothing in the setting or execution of this contract suggested that the agreement was procedurally unconscionable, relying upon Miller’s being an intelligent and educated man, having worked as an insurance claims manager, was familiar with the process of admitting his father to medical facilities, was not required to sign the agreement as a condition of admission, a fact noted in capital letters at the top of the arbitration agreement, and with no undue influence or pressure put on him to sign it. The court further relied on the fact that the arbitration agreement was presented as a separate document, was discussed at the time of admission, was bilateral in that either party can invoke its provisions, that all rights and remedies available in the courts were preserved for the arbitrator, and that Miller had a unilateral right of rescission for 30 days after execution of the agreement.

The court distinguished this case from those in other jurisdictions finding a nursing admission agreement unconscionable where the arbitration clause was a condition of admission, when the patient’s acute condition had created overwhelming pressure on the relative to sign, when the arbitration agreement was buried within a large document, or where the relative who signed it was illiterate, noting that they expressed no opinion as to whether the facts in those cases would constitute unconscionability in Massachusetts.

The court also refused to invalidate the arbitration clause based upon public policy grounds nor alleged inherent unfairness to patients because of pressures created by the acute need for nursing care. The court noted that there is a strong public policy favoring the proper management of nursing facilities and the provision of quality care to their residents, reflected in a regulatory scheme through which complaints and concerns regarding those matters are investigated and remedied by state and federal administrative agencies. The court felt that the arbitration agreement clearly preserved those interests when indicating in the agreement that its terms shall not limit the residents’ right to file a grievance or complaint with the facility or any appropriate government agency, from requesting an inspection from such an agency, or from seeking review under applicable federal regulations of a decision to transfer or discharge the patient.

The court further did not find that the principle of judicial economy, on which the trial court relied, was adequate grounds to set aside an otherwise valid agreement, indicating that the fact that Miller may be forced to proceed against the nursing home defendants in arbitration and the examining doctor(s) in court, whether inconvenient, duplicative, or inefficient is not determinative and is the necessary result of the choice that Miller made when he signed the arbitration agreement.

In a subsequent nursing home death case, Janet A. Constantino v. Pamela Frechette & others, 73 Mass.App.Ct. 352, 897 N.E.2d 1262 (Mass.App.Ct. Dec 18, 2008) the Court of Appeals decided that nurses named as defendants, who were employed by the nursing home but were not parties to the nursing contract nor its arbitration agreement, were not entitled to invoke its arbitration provision. The court ruled further that these nurses cannot otherwise invoke the arbitration agreement as nonparties because they do not qualify as intended third-party beneficiaries to the contract. The court relied upon former Massachusetts decisions that if the nursing home harbored the intention to bring its employees within the purview of the arbitration provision, it had the duty to clearly inform its patients that the arbitration provision was intended to inure to the benefit of individual nurses all as well. The court distinguished the case from the facts in Miller, supra, where the independent two-page document expressly stated that the parties intended that the agreement would inure to the benefit of the agents, employees, and servants of the nursing home. The court further declined to adopt a rule granting agents the per se right to enforce arbitration clauses negotiated by their principal.

Class Actions

In Feeney v. Dell, Inc., 454 Mass. 192, 205-08 (2009), the SJC held that an arbitration provision that had the effect of prohibiting participation in class actions is void as contrary to Massachusetts’s “strong public policy in favor of class actions for small value claims under” Mass. Gen. Laws Ch. 93A. The court found that the right to a class action in a consumer protection case is of particular importance where, as here, aggregation of small claims is likely the only realistic option for pursuing a claim. The court found that Dell’s class action prohibition in their contract undermines this policy and defeats the presumption that arbitration provides a fair and adequate mechanism for enforcing statutory rights. The court stated that allowing companies that do business in Massachusetts, with its strong commitment to consumer protection legislation, to insulate themselves from small value consumer claims, creates the potential for countless customers to be without an effective method to vindicate their statutory rights, a result clearly at odds with the state’s public policy. The court went on to note that their decision was not based on any judgment about the merits of a particular form for class-action adjudication, whether arbitration or litigation, and noted the reality that class arbitrations do in fact occur, and that the majority of the justices of the United States Supreme Court have, at least implicitly, endorsed class arbitrations as consistent with the Federal Arbitration Act.

The continued validity of the Feeney decision however, was placed in doubt by the United States Supreme Court decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) when Justice Antonin Scalia wrote on behalf of the 5-4 majority that the Federal Arbitration Act of 1925 preempted a California state law requiring the availability of class-wide consumer arbitration proceedings. By permitting contracts that exclude class action arbitration, the high court’s decision will make it much harder for consumers to file class action lawsuits.

However, in the remand of the Feeney case (above) in Massachusetts, Dell Computer argued that Concepcion gave companies wide authority to compel consumers individually to arbitrate their disputes. But Judge Douglas H. Wilkins disagreed. He wrote that “[Dell’s] arbitration agreement stands in stark contrast to the AT&T agreement in Concepcion, which had so many pro-consumer incentives that an individual consumer might be better off in arbitration than in class litigation” and further that “..The Dell Arbitration Clause provides no incentives and simply requires arbitration of all disputes, even those that could not possibly justify the expense in light of the amount in controversy.”

Pending legislation concerning pre-dispute arbitration agreements

The Arbitration Fairness Act was introduced in May of 2011 (S 987 IS0) and would make any pre-dispute arbitration agreement invalid and unenforceable if it requires arbitration of employment disputes, consumer disputes or civil rights disputes. The bill states that it was filed in response to a series of decisions by the Supreme Court of the United States that have changed the meaning of the Federal arbitration act to now extend it to consumer disputes and employment disputes. The sponsors of the act state that mandatory pre-dispute arbitration agreements undermine the development of public law because there is inadequate transparency and inadequate judicial review of an arbitrator’s decisions. The sponsors of this bill state that arbitration can be an acceptable alternative when consent to the arbitration is truly voluntary and occurs after the dispute arises.

Prior versions of this act have been filed yearly since 2009 and have not garnered sufficient support for passage.

Conclusion

As can be seen, Massachusetts Courts have endorsed the validity and enforceability of pre-dispute arbitration agreements but they have shown an admirable willingness on a case by case basis to invalidate or limit the scope of such agreements when strong public policy interests are adversely affected or the setting or execution of the contract was procedurally or substantively unconscionable.

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